Could Chinese yuan be set for bigger role as belt and road investors steer clear of US dollar risks?

The Chinese yuan could potentially play a larger role in global trade and investment, particularly within the framework of China's Belt and Road Initiative. Historically, investments under this initiative have been conducted in US dollars. However, due to rising global interest rates and geopolitical tensions, many borrowers are moving away from the US dollar. Observers suggest that the next phase of the Belt and Road Initiative could see more trade, financing, and investment deals carried out in the Chinese yuan as countries seek to mitigate the risks associated with the US dollar. Kanyi Lui, an international project finance lawyer and head of Pinsent Masons’ China offices, anticipates a shift towards RMB-denominated investments and financing. This year marks the tenth anniversary of the Belt and Road Initiative, a multibillion-dollar transcontinental strategy initiated by China. In a white paper released ahead of the third Belt and Road Initiative International Cooperation Summit Forum, Beijing revealed that it had signed bilateral currency swap agreements with 20 partner countries and established yuan-clearing arrangements in 17. This move is seen as an effort to increase the international footprint of the Chinese currency. China has also been encouraging the issuing of cross-border yuan-denominated or 'panda' bonds, driven by low yields in the domestic bond market. By the end of June, 99 panda bonds with a total value of 152. 54 billion yuan had been issued. Mark Bohlund, a senior credit research analyst at REDD Intelligence, believes the shift to Chinese yuan-denominated lending is a logical move for Beijing. He notes that the economic situation has shifted, with dollar inflows and foreign reserves more limited in relation to the size of the Chinese economy. At the same time, China’s ties with the US have become more fraught. Many African countries are suffering from a shortage of US dollars, as financial flows have shifted back to the US. Bohlund suggests that with China being the major source of imports for most Belt and Road countries, there is a rationale to have a higher share of renminbi among their foreign exchange reserves. A study released by BNP Paribas Asset Management supports this view. It notes that with the US increasingly using the dollar as a financial weapon through sanctions, there is a good incentive for African countries to reduce their US dollar risk and shift to the renminbi. The study also highlights that Egypt, a new Brics member with limited access to international capital markets, had in May become the first African economy to issue a panda bond to finance green and social projects. More than 5 per cent of Cameroon, Kenya and Tanzania’s external debt was already denominated in yuan. In January, China renewed discussions with Saudi Arabia on trading oil in yuan. Brazil, China and Russia were already working together on yuan cross-border payments. Due to international sanctions, Russia has been conducting most of its trade with China in yuan. Iran, Venezuela and Indonesia have also been settling some of their oil trades with China in yuan. Yun Sun, co-director of the East Asia Programme and director of the China Programme at the Washington-based Stimson Centre, suggests that if the Chinese use the yuan, the goal is evidently the internationalisation of the currency. However, she notes that there will be many obstacles, including the fact that the exchange rate of the yuan is not always decided by the market. This lack of convertibility has also hindered its usage as a reserve currency. Rolf Langhammer, a professor at the Kiel Institute for the World Economy, believes that China will probably change the direction of its presence in the Global South from the real sector to the financial sector. He suggests that this would go beyond the use of the yuan as an invoice currency in bilateral trade, but would be targeted to make it an attractive transaction currency and as a unit of account by convincing partner countries to price their commodities in yuan. Lauren Johnston, an associate professor at the University of Sydney’s China Studies Centre, suggests that a more important change would be if African countries begin intra-trading using the RMB. She notes that they don't take each others’ currencies, but they are happy to use the RMB.